A risky currency? Alleged $500,000 Bitcoin heist raises questions

A longtime Bitcoin user claims that a hacker has stolen half a million dollars …

Bitcoin, the decentralized virtual currency whose value has skyrocketed in recent weeks, faced a key test Monday as a veteran user reported that Bitcoins worth hundreds of thousands of dollars had been stolen from his computer.

Ars Technica was unable to independently verify the user's story, and he did not respond to our request for an interview. But whether the story is true or not, it highlights a major disadvantage of the currency's much-touted lack of intermediaries. Bypassing middlemen frees users from government meddling and bank fees. But it also deprives them of the benefits those intermediaries provide, including protection against theft and fraud.

As we reported last week, Bitcoin's key selling point is its clever peer-to-peer scheme for recording transactions. Rather than relying on a centralized database, the Bitcoin protocol allows any computer on the Internet to participate in the payment clearing process. At the end of each 10-minute round, one of the nodes is chosen at random to receive a payment for his contribution to the process. For this reason, participating in the clearing process is known as "mining" Bitcoins.

Wiped out

The user known as "allinvain" is a long-time contributor to the Bitcoin forums. He says he's been mining Bitcoins for over a year, and had amassed a fortune of 25,000 BTC. This was a modest sum a few months ago, when Bitcoins were worth pennies, but over the last two months the value of a Bitcoin skyrocketed to around $20, which means 25,000 BTC would have been worth half a million dollars. "I remember watching the price like a hawk," he wrote.

And then disaster struck. "I just woke up to see a very large chunk of my bitcoin balance gone," he wrote. "Needles [sic] to say I feel like I have lost faith in bitcoin." He speculated that a Windows security flaw may have allowed the culprit to gain access to his digital wallet. "I feel like killing myself now," he said.

Some other members of the Bitcoin forum expressed skepticism about allinvain's story, but most believed it. Another member of the Bitcoin forums chimed in to report that he'd lost a smaller amount of money to the same Bitcoin address.

Forum members discussed several options, including calling the police and asking MtGox, the popular Bitcoin currency exchange, to block the funds from being converted into more traditional currencies.

"An expensive test case"

Ars Technica talked to Gavin Andresen, the leader of the Bitcoin software project, about the incident. Andresen said that it would be difficult to confirm the authenticity of the report. "All Bitcoin transactions are broadcast on the network," he said. "So if someone wanted to claim they lost a bunch of bitcoins, they could claim that any transaction on the network belonged to them."

Still, the kind of attack described in the post is certainly possible. Andresen says he always emphasizes that Bitcoin is an experiment, and not (yet) for the faint of heart. "Unfortunately, this is an expensive test case for the guy who lost the Bitcoins," he said.

Andresen says that there's currently no good infrastructure for tracking down stolen Bitcoins. And, he said, there may never be a good mechanism for reversing unauthorized transactions because Bitcoin transactions are designed to be irreversible. "Once a transaction hits the network, you can generate other transactions that depend on that transaction," he said. "So Bitcoin transactions get tangled up fairly quickly."

Even if it were technically feasible, adding a mechanism for disputing transactions would create headaches of its own, because that mechanism could be used fraudulently as well. "Merchants like that there are no chargebacks" with Bitcoin transactions, Andresen said.

Right now, then, Bitcoin is a "work in progress" only suitable for the most technically savvy users. Will Bitcoin eventually be ready for the masses? Andresen thinks so. He told Ars that the Bitcoin protocol is flexible enough to support clients that handle security in a more sophisticated way. For example, a future client could split a user's private key between his PC and his cell phone. As long as no one compromised both devices simultaneously, the user's bitcoin would be safe.

The benefits of intermediaries

Still, a financial system without intermediaries has some inherent downsides. Splitting a Bitcoin user's private key between a computer and a cell phone makes it harder to compromise, but it also creates new risks. For example, unless the user backs up his cell phone separately from his computer, losing the phone would mean losing the Bitcoins. A multifactor authentication scheme also can't protect a user who is tricked into authorizing a payment to the wrong party.

Indeed, the traditional banking system offers consumers protections against fraud that are hard to replicate in any system without intermediaries. For example, federal regulations limit consumer liability for fraudulent credit card transactions to $50, and some banks offer cards that reduce the consumer's liability to zero.

And because liability for fraud falls mostly on the banks and credit card networks, these parties have invested in infrastructure to detect and deter fraud. They set minimum standards for getting a merchant account to exclude fly-by-night companies. They carefully monitor their customers' transactions and investigate any that look suspicious. And with the help of law enforcement, they aggressively prosecute fraud, both to recover lost funds and to deter other potential criminals.

Of course, some anti-theft and anti-fraud services can be built on top of the extant Bitcoin infrastructure. For example, Clearcoin holds payments in escrow for sellers until buyers receive their orders, making Bitcoin purchases less risky. And services like MyBitcoin hold Bitcoins on their customers' behalf. Presumably, these "online wallet" services can invest more heavily in securing their systems than individual users would.

But this is just to say that the disadvantages of an intermediary-free banking system can be mitigated by reintroducing intermediaries. And if most users are interacting with Bitcoin via intermediaries like ClearCoin and MyBitcoin, it's not obvious how many of the system's much-touted advantages are preserved. If your Bitcoins are held by a third party like MyBitcoin, then a government can force MyBitcoin to freeze your account just as it can force a traditional bank to do so.

In any event, Andresen seems unfazed by the heist and confident of Bitcoin's long-term viability. "These problems will get solved," he told Ars, arguing that the Bitcoin community simply hasn't grown large enough to throw serious engineering resources at them. And the broader Bitcoin community seems to agree. The market price of a Bitcoin has been stable over the last 48 hours at just under $20.

And because liability for fraud falls mostly on the banks and credit card networks, these parties have invested in infrastructure to detect and deter fraud. They set minimum standards for getting a merchant account to exclude fly-by-night companies. They carefully monitor their customers' transactions and investigate any that look suspicious. And with the help of law enforcement, they aggressively prosecute fraud, both to recover lost funds and to deter other potential criminals.

And this right here is exactly why the system will be nothing more than a novelty. Bitcoin misses the most important aspect of any currency, and that is confidence in using it and not being screwed.

Cash has upsides and downsides. If someone was holding $500,000 in cash walking down the street and got robbed, it'd be about the same as this. On the other hand, you could buy a house without a credit check.

Not to make a direct comparison (I know Bitcoin is aboveboard) but this reminds me of the attitude of internet scammers when they're expecting a big payday and the rug's taken out from under them. Lamenting over potential money that they never had...they take it harder than if they had actually gotten mugged.

The issue is somone is willing to pay $20 per monopoly dollar you have. A bitcoin is a good as any other, it can be exchanged between USD and back so loosing it is not just "someone stealing your monopoly money"

I made over $500 dollars buying and selling bitcoins with the bubble over the last 2 wks (at least that was my thought on trading, and it worked) so there is plenty of real money to be made if your brave and know a thing or two about markets.

Saying these things have no value is saying a babe ruth signed rookie card has no value. At a bank no, to someone it has plenty of value and can be sold.

All that being said, it will be interesting if this can be tracked and fixed. Doestn' seem likely but I hope BTC takes off, it's a game changer if it can, that's for sure.

I was about to post the same thing. Must suck to to have so much invested in non-tangible invisi-dollars only to have it disappear, which is about a zero sum change.

You people are sooo silly. Do you know what makes the dollar valuable? The fact that people think it is. You can't trade it in to the US government for gold or any other intrinsically scarce or useful resource. Same with Bitcoin, if people decide that bitcoins are valuable and worth taking in trade for goods and services then they are just as valid a currency as dollars.

I don't mine bitcoins or use them but your attitude is a very naive one.

And because liability for fraud falls mostly on the banks and credit card networks, these parties have invested in infrastructure to detect and deter fraud. They set minimum standards for getting a merchant account to exclude fly-by-night companies. They carefully monitor their customers' transactions and investigate any that look suspicious. And with the help of law enforcement, they aggressively prosecute fraud, both to recover lost funds and to deter other potential criminals.

And this right here is exactly why the system will be nothing more than a novelty. Bitcoin misses the most important aspect of any currency, and that is confidence in using it and not being screwed.

Not to make a direct comparison (I know Bitcoin is aboveboard) but this reminds me of the attitude of internet scammers when they're expecting a big payday and the rug's taken out from under them. Lamenting over potential money that they never had...they take it harder than if they had actually gotten mugged.

What makes all of this fishy there are vendors willing to take bitcoins and provide silver coins in return. Why would someone let their account balance hit 500K in monopoly money without arbing such an easy money opportunity. There are supposed vendors that trade bitcoins for Canadian 1 ounce .9999 silver dollars.

Bitcoins are monopoly money generated on the fly. You install this Bitcoin program, it does fancy math using idle CPU time and anytime it gets the right answer you get a magical bitcoin.

So you harvest these magical bitcoins and spend them on vendors willing to take these magical bitcoins and get something tangible in return.

For example Supposedly you can spend the bitcoins on silver coins.

If this is really the case, the moment you hit 50K bit coins why not spend it by paying this vendor willing to take bitcoins for silver bullion right a way and buy all those silver coins. PROFIT!

The whole thing is fishy.

Not saying that the whole thing couldn't be a hoax but if someone was trying to make a profit why would they sell in the middle of a huge increase on the value? Unless they saw some bubble taking place there would be no reason to sell.

Arguably, this sort of problem is (somewhat) solvable; but only if they muster enough interest to get hardware developed.

Storing one's bitcoins on a general-purpose computer is just a non-starter: The security offered isn't good enough(between genuine security holes and trojan horses) and the data retention, on average, isn't good enough(HDDs die, machines get wiped, etc.) Even smartphones get lost/stolen/crushed/potentially hacked. Honestly, it's only the fact that the early adopters are largely hardcore geeks that has kept most of the extant bitcoins from not being lost to data-rot already.

The only thing that would make matters more viable(and wouldn't hurt for ordinary banking) would be some sort of specialized peripheral, analogous to the Hardware Security Modules used for storing high-value crypto keys; but with the addition of a small screen and some buttons. Whenever you receive bitcoins, they would be sent to that device and then deleted from the host PC. If you wanted to spend bitcoins, the host PC could initiate a request; but the peripheral would display the destination address, amount, etc, and a physical keypress(or password entry) on the peripheral's independent keypad would be required to actually release the bitcoins.<br><br>

Anything less than such a device(and one with firmware written by people who know what they are doing) just won't be safe enough to store bitcoin of any serious value "online" and anything sufficiently well airgapped to be naively secure will be a pain in the ass to use for transactions.

It isn't as though this is unique to bitcoins, plenty of other 'just bits' that have high perceived value pass through computers and many of the same problems have to be solved for them; but trusting $500,000 to the security of a home Windows box is nuts. Even if the hackers don't get you, how about a housefire?

What this article fails to mention is that in all likelihood this theft would have been prevented if the user had simply encrypted his wallet.dat file. If you don't do that, any hacker that can gain access to your computer has access to your Bitcoins. This guy would also have lost his Bitcoins if his hard drive crashed.

The Bitcoin client REALLY needs to build in encryption for local wallet files. Until then, people can avoid this problem by putting their wallet.dat file in an encrypted archive and storing it somewhere safe like a Dropbox protected by a reasonably strong password (i.e. what you should already be doing with important files).

The issue is somone is willing to pay $20 per monopoly dollar you have. A bitcoin is a good as any other, it can be exchanged between USD and back so loosing it is not just "someone stealing your monopoly money"

If you're converting real money into a currency that isn't based on a commodity standard, you're a fucking moron, and we have several hundred years of economics to thank for proving that basic principle. Some people have to learn the hard way, i just don't understand how people can be so gullible and allow themselves to be taken advantage of like that.

If you're converting real money into a currency that isn't based on a commodity standard, you're a fucking moron, and we have several hundred years of economics to thank for proving that basic principle. Some people have to learn the hard way, i just don't understand how people can be so gullible and allow themselves to be taken advantage of like that.

You mean like USD? or gold?

I don't use bitcoins, nor would I recommend anybody else at this point, but that's just flat out wrong.

Bitcoins are monopoly money generated on the fly. You install this Bitcoin program, it does fancy math using idle CPU time and anytime it gets the right answer you get a magical bitcoin.

So you harvest these magical bitcoins and spend them on vendors willing to take these magical bitcoins and get something tangible in return.

For example Supposedly you can spend the bitcoins on silver coins.

If this is really the case, the moment you hit 50K bit coins why not spend it by paying this vendor willing to take bitcoins for silver bullion right a way and buy all those silver coins. PROFIT!

The whole thing is fishy.

Not saying that the whole thing couldn't be a hoax but if someone was trying to make a profit why would they sell in the middle of a huge increase on the value? Unless they saw some bubble taking place there would be no reason to sell.

You don't sell them all, but any good trader knows that you never keep all your eggs in one basket, and you don't wait for one time to sell all your stuff. You buy and sell in chunks, and you increase or decrease your position bit by bit as the price changes.

Bitcoins are monopoly money generated on the fly. You install this Bitcoin program, it does fancy math using idle CPU time and anytime it gets the right answer you get a magical bitcoin.

So you harvest these magical bitcoins and spend them on vendors willing to take these magical bitcoins and get something tangible in return.

For example Supposedly you can spend the bitcoins on silver coins.

If this is really the case, the moment you hit 50K bit coins why not spend it by paying this vendor willing to take bitcoins for silver bullion right a way and buy all those silver coins. PROFIT!

The whole thing is fishy.

It's not anymore fishy then someone believing pieces of paper with nice text printed on them can be exchanged for silver. It's a currency, it's worth whatever people think it's worth. The only "fishy" thing about it, is whether it's worth with hold steady, increase, or decrease over time.

The issue is somone is willing to pay $20 per monopoly dollar you have. A bitcoin is a good as any other, it can be exchanged between USD and back so loosing it is not just "someone stealing your monopoly money"

We call those people retards.

I'm not seeing how this fiat currency is any less or more silly than any other fiat currency.

So, the only way the bitcoins could be stolen would be if his machine was compromised, yes? As I understand it, every bitcoin has a current user associated with it and the ownership history is tracked with each coin. So to steal the coin you would either need to know his private key, which would be nearly impossible to get by brute force cracking. Ergo, the hacker got into his machine.

What makes all of this fishy there are vendors willing to take bitcoins and provide silver coins in return. Why would someone let their account balance hit 500K in monopoly money without arbing such an easy money opportunity. There are supposed vendors that trade bitcoins for Canadian 1 ounce .9999 silver dollars.

I find it hilarious how all these bullshit scams are popping up and suddenly the idiot libertarians who bought into this nonsense are finding out the hard way that anonymous untraceable transactions aren't always a good thing.

there's also at least one casino thing that's almost certainly a scam, and I think someone has actually created a site that supposedly lets you short sell bitcoins

it's like they're running through the centuries-long process of discovering why currencies need regulations etc in just a few weeks.

Cash has upsides and downsides. If someone was holding $500,000 in cash walking down the street and got robbed, it'd be about the same as this. On the other hand, you could buy a house without a credit check.

Exactly. It is a bit more complicated to secure bitcoin as miners have to access a private key on the machine that is doing the proof-of-work, and buyers need to access their private key when performing the transaction. The simple approach is to store the key on a windows computer that is connected to the internet, which isn't extremely secure.

What this shows to me is that if you are holding large amounts of bitcoin, you should never access your private key on a computer connected to the network. For example, if you are mining, you should use a throwaway key in the proof-of-work, and then periodically transfer over the the money to your main identity. That way only your public key is ever on a network attached computer, and you only risk loosing the money which you haven't transferred yet. To transfer money out, generate the transaction on a computer disconnected from the network which contains the public key, and publish the transaction via sneakernet.

Timothy B. Lee / Timothy covers tech policy for Ars, with a particular focus on patent and copyright law, privacy, free speech, and open government. His writing has appeared in Slate, Reason, Wired, and the New York Times.